Objectivity in accounting

Objectivity in accounting
See also
Quality of accounting General audit Continuous audit Audit evidence Accounting error Account settlement Management representation letter Reporting entity Accounting control

Objectivity in accounting is the process of recording and summarizing financial transactions in an unbiased, accurate, and impartial manner. Objectivity requires financial information to be recorded in a consistent and verifiable manner, and that all transactions are accurately reported in accordance with accepted accounting principles and standards. Objectivity is essential in the management of financial resources, as it ensures that the reports are reliable and trustworthy, and that the stakeholders have an accurate view of the organization's financial state and performance. This helps the organization to make more informed decisions, focus resources and maximize profits.

Example of objectivity in accounting

• An example of objectivity in accounting is the recording of financial transactions. All financial transactions must be recorded in a consistent and verifiable manner, and all transactions must be accurately reported in accordance with accepted accounting principles and standards. This ensures that the financial records are reliable and trustworthy, and that the stakeholders have an accurate view of the organization's financial state and performance.
• Another example of objectivity in accounting is the use of independent auditors. Auditors are hired to provide an unbiased and independent opinion on the accuracy of a company's financial statements. This helps to ensure that the financial reports are accurate and reliable.
• Finally, objectivity in accounting also includes the use of internal controls. Internal controls are used to ensure the accuracy of financial reports and to prevent fraud or mismanagement. These controls can include segregation of duties, authorization processes, and the use of accounting software. These controls help to ensure that the financial information is accurate and reliable.

Types of objectivity in accounting

Objectivity in accounting is the process of recording and summarizing financial transactions in an unbiased, accurate, and impartial manner. There are several types of objectivity in accounting, including:

• Financial Statement Objectivity: This is the concept of providing objective and reliable financial information to stakeholders. Financial statement objectivity requires that the financial statements are prepared in accordance with accepted accounting principles and are free from errors and bias.
• Internal Control Objectivity: This is the concept of having internal controls in place to ensure the accuracy and integrity of the financial statements. Internal control objectivity requires that the organization has an adequate system of internal controls in place to ensure the accuracy and reliability of the financial reports.
• Auditor Objectivity: This is the concept of having an independent auditor review the financial statements to verify the accuracy and reliability of the information. Auditor objectivity requires that the auditor is independent of the organization and has no stake in the financial statements.
• Risk Management Objectivity: This is the concept of having an adequate system of risk management in place to identify and address potential risks to the organization. Risk management objectivity requires that the organization has an adequate system of risk management in place to identify and address potential risks to the organization.

Advantages of objectivity in accounting

Objectivity in accounting is essential for ensuring accuracy and reliability in financial reporting. It is beneficial to the organization and its stakeholders in several ways, such as:

• Objectivity helps the organization to maintain accurate and reliable financial records, which can be used for decision making and performance evaluation.
• It helps to ensure that financial information is complete and accurate, and that all transactions are recorded in a consistent manner.
• Objectivity also facilitates the audit process, as it provides verifiable evidence and helps to verify the accuracy of financial statements.
• Objectivity in accounting helps to protect the organization from fraud, as it ensures that all transactions are recorded accurately and reported in accordance with accepted accounting standards.
• Objectivity also supports the organization in its objectives of transparency, as it enables stakeholders to have an accurate view of the organization's financial state and performance.

Limitations of objectivity in accounting

Objectivity in accounting is a critical element of financial management and reporting, as it ensures that the reports are reliable and trustworthy. However, objectivity has its limitations, which include the following:

• Subjectivity: Despite its best efforts, accounting is still subject to human bias and interpretation. Financial statements may be impacted by personal preference, errors, or misjudgments.
• Inaccurate information: There is always the risk of mistakes being made when recording and summarizing financial transactions. This can lead to inaccurate reports and may lead to incorrect decisions being made.
• Limited information: Objectivity in accounting is limited to financial information. It does not take into account any other factors that may impact the organization's financial state, such as customer satisfaction, employee morale, or changes in the market.
• Cost: Ensuring that the financial information is accurate and reliable can be costly, as it requires the use of sophisticated software and skilled personnel.

Other approaches related to objectivity in accounting

Objectivity in accounting is an important concept that helps ensure the accuracy of financial records and reports. In addition to the core concept of objectivity, there are several other approaches related to it that help ensure the reliability of financial data. These include:

• Professionalism: Accounting professionals must maintain high levels of ethics and integrity when recording and reporting financial transactions. This includes following accepted accounting principles and standards, and avoiding any conflicts of interest that could lead to biased reporting.
• Transparency: Financial reports should be clearly written and easily understood by stakeholders. This helps everyone to understand the financial state of the organization and make informed decisions.
• Accuracy: All financial transactions must be accurately reported, including the amounts and dates of each transaction. Inaccurate reports can lead to inaccurate decisions.
• Auditing: Auditing is a process that helps to verify the accuracy and reliability of financial reports. It involves a review of the organization’s financial records and reports by an independent third party.

In summary, objectivity in accounting is an important concept that helps ensure the accuracy and reliability of financial information. This is achieved by following accepted accounting principles and standards, maintaining professional ethics, ensuring transparency, accuracy and auditing.

Suggested literature

• McKernan, J. F. (2007). Objectivity in accounting. Accounting, Organizations and Society, 32(1-2), 155-180.